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How much is your life worth?
N Sriram |
January 06, 2005
re you insured? This is what your father/ uncle will ask you when you tell them you want to invest your money.
Before you tick them off as old-fashioned, make sure you know what this actually means.
Insurance is a two-way street.
The life insurance company pays you if destiny tampers with your life. You pay them for that eventuality (don't smirk, your contribution is miniscule compared to what you/ your loved ones would get).
Let's get down to the nitty gritty. Before that, let's understand a few terms that we shall be using thoughout this article:
~ Premium refers to the amount you will have to pay the insurance company. This could be a one-time payment or a periodic, annual payment.
~ Beneficiary refers to the person/ s you have named in the policy; they are the ones who will get your insurance money.
~ Cover refers to the amount you are insured for -- the coveted amount the insurance company will pay you.
So let's get started.
I. Term Insurance
This is the most basic form of life insurance.
Here, the entire premium you pay goes towards covering the risk of death over a certain number of years. Say you insure yourself for 30 years. You will have to pay a one-time premium for all these years, or a premium every year.
If you are around after the term is over (30 years, in your case), you will forfeit the premiums paid.
But if something unfortunate were to happen to you when the insurance cover is in force, your beneficiary gets a windfall, compared to the premiums paid.
~ Scenario One: You pay; you get nothing; your beneficiary gets nothing.
~ Scenario Two: You pay; you get nothing; your beneficiary does.
Here is a simpler simple explanation: Term insurance works like a betting game.
You are willing to bet that you would die this year and cough up, say, Rs 2,000.
The insurance company bets that you will not die and is willing to pay your family, say, Rs 1 million if you do.
If you survive, you lose the bet. And the insurance company takes away the Rs 2,000.
If you win the bet, you know what happens!
The bet goes on over a period of 5, 10, 15, 20... whatever number of years that both you and insurance company have agreed to.
Don't give up so quickly!
If this does not tickle your fancy, there are other options to consider:
II. The Endowment Policy
This policy is for a particular time. Let's say 30 years.
Should you die during this period, your beneficiary will get the money.
Should you survive, you get the money at the end of 30 years.
The good news: You win both ways, whether you survive or not.
The bad news: You will need to pay much larger sums -- at least three times higher -- as premiums.
III. The Whole Life Policy
This makes you pay premiums all your life. There is no fixed term.
When you die, your beneficiary gets the money.
The good news: No money is lost. Someone gets it eventually.
The bad news: You will need to pay much larger sums - at least three times higher – as premiums.
Why a Term Policy scores
1. It is cheap.
Let's compare a Term Policy with an Endowment Policy in terms of how much you will pay as premium. If you are say, 30 years of age, you would pay a premium of about Rs 1,800 every year for a 30-year Term Life cover of Rs 5 lakh.
In contrast, if you took a 30-year Endowment Policy cover for Rs 2 lakh, you would end up paying a premium of around Rs 6,500 a year.
So, a Term Policy offers you double the cover for about one-fourth the premium.
2. You can circumvent the additional returns you would get from other policies.
Going with the above example, if you do survive three decades, nothing comes back in the Term plan.
But under the Endowment cover, you would get the assured sum (which is also known as your cover -- the amount you are insured for), plus a bonus (additional amount).
So you could end up with around Rs 5 lakh (Rs 2 lakh + Rs 3 lakh as bonus) in total.
If you think that this is a good deal, hang on.
~ You pay the comany Rs 1,800 every year for the Term Policy.
~ For the Endowment Policy, where you get a hefty Rs 5 lakh back, you pay the company Rs 6,500 every year.
Now think about this alternative:
i. Pay the company Rs 1,800 every year.
ii. Take a Term Policy.
iii. Invest the balance of Rs 4,700 (Rs 6,500 - Rs 1,800), that you save as premium, wherever you want.
Consider stocks or equity mutual funds as an investment option over a long term. Your risks would be equally low, but your returns would be higher.
But remember: the key word is 'long term'.
3. You can get better liquidity if you put only a portion in Term Insurance.
Liquidity is a term used to denote how fast you can sell your investment and get money (liquid cash).
So if you invest the notional 'difference' in premiums (Rs 4,700) between a Term and any other kind of plan in some investment (say, in a mutual fund), you can cash out all of it in an emergency in around 48 hours.
In contrast, in an insurance policy, you have to pledge the policy and seek a loan against it.
Then pay an interest of about 8% to 10% on that loan.
4. You may end up getting underinsured.
If the premium is high, you might be tempted to go for a smaller sum as cover.
Say you are 30 years old and looking for a life cover of Rs 20 lakh. You would spend about Rs 7,200 in a Term Policy.
In contrast, an Endowment Policy would set you back by about Rs 26,000.
Now, because you cannot afford Rs 26,000, you might be tempted to go for an Endowment Policy of only Rs 10 lakh that would cost Rs 13,000 a year.
Do you know what you have done? In one stroke, you have halved your life's financial worth!
If something were to happen to you, your family would get much less than they deserve.
Whatever policy you choose, don't meddle with the sum that you think your family deserves when you are gone.
Term insurance too plain for your complex needs? You can buy some hot chocolate sauce to go with this plain vanilla policy.
For example, Birla Sun Life's Medicare Plan offers a health-related protection.
It takes care of treatment expenses on critical illnesses like cancer, stroke and heart attack if you were to suffer from them during the policy period. For a little extra premium, of course.
A 25-year old male taking a Rs 5 lakh term policy with a Rs 1 lakh critical illness cover for 20 years will pay Rs 2,276.5% per year.
SBI Life's Shield offers to increase the value of the cover regularly without charging any extra premium from you.
It helps because when you upgrade your lifestyle, you don't have to buy extra insurance. You get bigger and bigger covers without having to do anything!
Let's talk tax!
Murmuring about the tax benefits? Not to worry.
As with all insurance policies, the premium you pay for a Term Insurance Policy is eligible for rebate under Section 88 of the Income Tax Act at rates ranging up to 30%, depending on how much you earn.
Rememer, if you are taking a Term Policy with riders like critical illness, make sure you segregate and claim the premium (that you pay for such riders) as 'medical insurance' deduction under Section 80 D.
The last word
Most life insurance companies in India offer at least one term plan each.
Consult your insurance advisor for details. But don't expect him/ her to be enthusiastic about Term plans since insurance advisors get the least incentives for selling term plans.
Insist on information till you get it.
Remember: A Term Policy can be a gift only to your family and not to yourself.
Illustration: Dominic Xavier